Opinion
00 Civ. 2935 (JSM)(KNF)
April 26, 2002
MEMORANDUM AND ORDER
I. INTRODUCTION
Before the Court is plaintiff Marathon Ashland Petroleum LLC's (MAP) motion, made pursuant to Fed.R.Civ.P. 15(a) and (d), to file a second amended complaint and an amended reply to defendants' counterclaims. Plaintiff contends that the amendments are necessary to reflect plaintiff's potential entitlement to the proceeds from the sale, chaffer or other disposition of the vessels which are the subject of this action in the event the court awards defendants liquidated damages pursuant to the parties' written agreement. Defendants oppose the motion. For the reasons set forth below, the motion is granted.
II. BACKGROUND
In December 1980, a predecessor to MAP, Ashland Oil, Inc. ("Ashland") and Equili Company, L.P. ("Equili") entered into a bareboat charter pursuant to which Ashland obtained the exclusive use of the oil tanker MN Kentucky ("Kentucky"). In February 1981, Ashland entered into a bareboat charter with Equili Company II, L.P. ("Equili II") pursuant to which Ashland obtained the exclusive use of the oil tanker M/T West Virginia ("West Virginia")
On January 27, 1995, Ashland Oil, Inc., changed its name to Ashland, Inc. By assignment and assumption agreements dated December 31, 1997, the bareboat charters that are at issue here were assigned by Ashland, Inc. to MAP.
In June 1996, Equili Company, L.P. changed its name to Equili and Equili Company II, L.P. changed its name to Equili II.
The Kentucky and West Virginia bareboat charters were financing arrangements under which defendants, as owners, paid the purchase price of the tankers; Ashland, as charterer, received the exclusive use of the vessels for twenty years; and Ashland agreed to pay semiannual lease payments to the defendants. The Kentucky charter was to expire on January 15, 2001, and the West Virginia charter was to expire on January 5, 2002. For the purposes of this action, the terms and conditions of the two bareboat charters were, in all other material respects, identical.
Article 13 of the bareboat charters provided that, in the event the charterer made a good faith determination, as evidenced by a certificate of an authorized officer of the charterer, that the subject vessel had become obsolete or uneconomic, the charterer had the right, on prior written notice to the owner, to terminate the charters on any "Basic Hire Payment Date" (that is, any January 15 or July 15 during the charter period), which occurred after the seventh anniversary of the delivery date (that is, the date on which the vessel was delivered to the charterer). Each such date was called an "Obsolescence Termination Date."
Article 13 of the charters provided further that, in the event the charterer gave such notice of termination, it was entitled, as agent for the owner, to obtain bids for cash sales of the subject vessels to take place on the Obsolescence Termination Date; alternatively, the owner had the right to elect to retain title to the subject vessels. In addition, under the terms of the charters, in the event the owner elected to retain title to the subject vessels, the charterer was required to pay to the owner "all Hire then due and the excess, if any, of the Stipulated Loss Value over . . . the then Fair Market Value of the Vessel."
Under the terms of the charters, if the owner elected to sell the subject vessel on the applicable Obsolescence Termination Date, the charterer was required to pay, in addition to "all Hire then due," the difference between the stipulated loss value of the vessel and the net sales price of the vessel, minus any costs incurred by the owner in connection with the sale. The charters define "Stipulated Loss Value" as an amount determined by multiplying the owner's cost for a vessel by a certain specified percentage. The charters define "Fair Market Value" as "the fair market value of the Vessel as determined by mutual agreement between the Owner and the Charterer or . . . by the Appraisal Procedure."
On December 1, 1999, plaintiff sent a letter to Equili II certifying that it had made a good faith determination that the West Virginia had become obsolete or uneconomic. The letter stated further that, pursuant to Article 13 of the West Virginia charter, plaintiff was exercising its right to terminate the agreement. On December 9, 1999, plaintiff sent a letter to Equili certifying that it had made a good faith determination that the Kentucky had become obsolete or uneconomic and that, pursuant to Article 13 of the Kentucky charter, plaintiff was exercising its right to terminate that agreement.
After giving notice of termination of the charters, plaintiff located a buyer which was prepared to purchase both vessels on "as is, where is" terms for a price of $8.1 million on the applicable obsolescence termination date. Plaintiff advised the defendants of this offer.
Defendants elected to retain title to the vessels and, by agreement between the parties, the Kentucky and West Virginia were returned by plaintiff to the defendants at Copenhagen, Denmark on January 18, 2000. At that time, the bareboat charters for the vessels were terminated.
On January 5, 2000, plaintiff paid to Equili II the hire then due and owing under the bareboat charter for the West Virginia: $1,705,956.40. On January 18, 2000, plaintiff paid: (i) $1,670,441.36 to Equili for the hire of the Kentucky; (ii) $4,727,857.13 to Equili II for the difference between the stipulated loss value of the West Virginia ($9,027,857.13) and the vessel's fair market value ($4,300,000); and (iii) $2,530.003.95 to Equili for the difference between the stipulated loss value for the Kentucky ($6,330,003.95) and the vessel's fair market value ($3,800,000).
On April 17, 2000, plaintiff filed a complaint, pursuant to 28 U.S.C. § 2201, for a declaratory judgment that plaintiff terminated the bareboat charters for the Kentucky and the West Virginia properly. By agreement of the parties, the complaint was amended on October 24, 2000.
MAP's original complaint contained a reference to confidential settlement negotiations; the parties agreed subsequently that the complaint would be amended to remove the reference.
In their answer, filed on May 22, 2000, defendants alleged that the existence of $2.6 million in claims, and the deteriorated condition of the vessels at the time they were returned to the defendants, breached the charters and also constituted events of default that barred plaintiff from invoking Article 13 of the charters. Defendants alleged further that plaintiff's notices of termination of the charters were ineffective and improper because the vessels were not obsolete or uneconomic. In addition, defendants asserted that the return of the vessels on January 18, 2000, and the payments made to them by plaintiff on that date, were made without prejudice to the defendants' claim that plaintiff was not entitled to terminate the charters. Defendants have sought actual damages in the amount of $11 million and, in the alternative, $8.1 million in liquidated damages.
Plaintiff filed a reply to defendants' counterclaims on June 12, 2000,inter alia, denying that defendants are entitled to liquidated damages.
Plaintiff now asserts that, subsequent to the return of the vessels on January 18, 2000, defendants chartered them on numerous occasions to third parties and were paid freight for the use of the vessels. Plaintiff claims further that, on June 12, 2001, the Kentucky and West Virginia were sold to General Maritime Corporation ("GMC") as part of a complex public offering of stock. Plaintiff avers that it learned of the sales in August 2001 and immediately sought to discover the terms of the sales. Plaintiff claims that the information regarding the sales provided by the defendants reveals that the shares of the subsidiary companies owning the vessels were transferred to GMC in exchange for the repayment of $10 million in debt and a large number of shares in GMC.
Plaintiff denies liability for liquidated damages in connection with the termination of the Kentucky and West Virginia charters. Plaintiff asserts, however, that, pursuant to Article 14(b)(ii) of the charters, it is entitled to a credit for the proceeds of the charter and sale of the vessels should the defendants' liquidated damages claim be granted. Article 14(b)(ii) of the bareboat charters for the Kentucky and West Virginia, in its most pertinent part, provides:
The Owner . . . may require the Charterer to pay to the Owner and the Charterer hereby agrees that it will pay to the Owner . . . as liquidated damages for loss of a bargain and not as a penalty . . . an amount equal to all unpaid Basic Hire . . . plus an amount equal to the Stipulated Loss Value . . . and upon such payment of liquidated damages, the Owner shall pay over to the Charterer the net proceeds of any sale, charter or other disposition of the Vessel.
Accordingly, plaintiff seeks to amend its complaint, pursuant to Fed.R.Civ.P. 15(a) and (d), to add claims for the net proceeds of the sale, charter or other disposition of the vessels, in the event defendants are found to be entitled to recover liquidated damages. In addition, plaintiff seeks to amend its reply to defendants' counterclaims to add affirmative defenses for the same proceeds, either directly or by way of a setoff.
In opposing the motion, the defendants claim that any amendment to the pleadings would be futile because plaintiff has failed to state a cause of action. In addition, the defendants contend that there is no new information that would warrant filing a second amended complaint.
According to the defendants, plaintiff breached the bareboat charters by terminating them wrongfully. Therefore, according to the defendants, plaintiff should have paid liquidated damages to the defendants in the amount of approximately $15 million, or the entire stipulated loss value for each vessel, when it returned the vessels on January 18, 2000, and should not have deducted $8.1 million as a fair market value credit. Moreover, according to defendants, since plaintiff should have paid liquidated damages at the time the vessels were returned to the defendants, and since, at that time, the vessels had not been chartered, sold, or otherwise disposed of, plaintiff is not entitled to any setoff against the liquidated damages that were then due. Defendants contend that the charters' "plain language" supports its interpretation of the terms of the parties' written agreement with respect to any liquidated damages provision. Specifically, defendants claim that the charters' liquidated damages provision "cannot be read to impose a continuing obligation to provide all sale proceeds or charter payments forever thereafter."
Defendants assert further that there is no new information that would warrant filing a second amended complaint because, by October 2000, the date on which plaintiff filed its first amended complaint, plaintiff knew that the defendants were chartering the vessels. Defendants claim that, although the defendants' more recent chartering and sale of the vessels occurred after October 2000, plaintiff has been aware of similar transactions since May 2000, the date on which the defendants filed their answer and counterclaims.
In its reply, plaintiff contends that defendants' claim that any amendment to the pleadings would be futile is meritless. According to plaintiff, defendants cannot demonstrate that plaintiff's proposed amendments are futile. On the contrary, plaintiff contends, its new claims are likely to succeed if defendants are awarded liquidated damages because: (a) under the terms of Article 14(b)(ii) of the charters, plaintiff is entitled to a setoff; (b) Article 14(b)(ii) of the charters does not contain a time limitation on the application of this right; (c) defendants' argument that payment of liquidated damages occurred when the vessels were returned on January 18, 2000, is incorrect; and (d) there has been no determination that defendants are entitled to liquidated damages.
According to plaintiff, the defendants' contention that the payments made by plaintiff on January 18, 2000, were equal to liquidated damages is belied by the plain language of the charters, which shows that "stipulated loss value" and "liquidated damages" are distinct concepts. Stipulated loss value is a penalty paid upon termination of a charter to make the owner whole for the purchase price plus interest of the subject vessel. Liquidated damages represent an amount paid for the "loss of the bargain and not as a penalty."
Plaintiff claims further that defendants' statement that there is no new information that would warrant a supplemental pleading is contradicted by the admission that the Kentucky and West Virginia were sold in June 2001. In addition, plaintiff contends that, prior to August 2001, it did not have information establishing that defendants had earned profits from the charter of the vessels during the latter part of 2000 and the first quarter of 2001. Consequently, plaintiff asserts, it did not have sufficient basis for asserting a claim under Article 14(b)(ii) of the charters for a credit based on those profits until August 2001.
III. DISCUSSION
Rule 15(a) of the Federal Rules of Civil Procedure provides that "[a] party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served. . . . Otherwise a party may amend the party's pleading by leave of the court . . . and leave shall be freely given when justice so requires." Fed.R.Civ.P. 15(a); see also Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230 (1962).
The determination to grant or deny a motion to amend a complaint is within the discretion of the court. See New York State Nat'l Org. for Women v. Cuomo, 182 F.R.D. 30, 36 (S.D.N Y 1998). However, there must be good reason to deny such a motion. See Acito v. Imcera Group Inc., 47 F.3d 47, 55 (2d Cir. 1995) (citing S.S. Silberblatt, Inc. v. East Harlem Pilot Block Bldg.1 Hous. Dev. Fund Co., Inc., 608 F.2d 28, 42 [2d Cir. 1979]). "[U]ndue delay, bad faith or dilatory motive on the part of the movant . . . undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of [the] amendment" are valid reasons to deny the motion. Foman, 371 U.S. at 182, 83 S.Ct. at 230.
A determination that a proposed claim is futile is made under the same standards that govern a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. See A.V. by Versace, Inc. v. Gianni Versace, S.p.A., et al., 160 F. Supp.2d 657, 666 (S.D.N Y 2001). "Therefore, if the proposed claim would be subject to dismissal under Rule 12(b)(6), the Court should refuse to grant leave to amend rather than assent and then await a motion to dismiss." Id. (internal quotes omitted).
However, courts should exercise caution in deciding that a claim is futile. "A proposed claim may be labeled futile only where it is clearly frivolous or legally insufficient on its face." Gallegos v. Brandeis School, et al., 189 F.R.D. 256, 259 (E.D.N.Y. 1999) (internal quotes omitted). If the proposed claim alleges facts and circumstances which may entitle the plaintiff to relief, then futility is not a proper basis on which to deny the amendment. See id. Moreover, "even where the possibility of relief is remote, amendment must be permitted because it is the possibility of recovery, not its likelihood, that guides the court's analysis." Id.
Rule 15(d) of the Federal Rules of Civil Procedure permits parties leave "to serve a supplemental pleading setting forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented." Fed.R.Civ.P. 15(d). The claims raised in the supplemental pleading "do not need to arise out of the same transaction or occurrence as the original; they need only bear some relationship to the subject of the original pleading." Eison v. Kallstrom, 75 F. Supp.2d 113, 116 (S.D.N.Y. 1999) (quoting 3 Moore's Federal Practice, § 15.30 at 15-108 [Matthew Bender 3d ed. 1998]).
Article 14(b)(ii) of the Kentucky and West Virginia charters provides, in pertinent part, that "upon such payment of liquidated damages, the Owner shall pay over to the Charterer the net proceeds of any sale, charter or other disposition of the Vessel." It is undisputed that defendants have received proceeds from the charter of the vessels since the return of the vessels in January 2000, and that the vessels were sold in June 2001. Defendants are seeking, inter alia, liquidated damages in the amount of $8.1 million. Thus, under the express terms of Article 14(b)(ii) of the charters, in the event defendants prevail on their liquidated damages claim, plaintiff would be entitled to a credit for the net proceeds of the charter and sale of the vessels. Whether Article 14(b)(ii) of the charters may be interpreted in such a way as to preclude this result has not yet been determined. In addition, it has not yet been determined whether plaintiff breached the bareboat charters, as defendants allege. Thus, whether the payments already made by plaintiff to the defendants, pursuant to Article 13 of the charters, are properly construed as payment of liquidated damages is a matter in dispute. Until such time as these disputed matters are resolved, plaintiff's proposed amendments to the pleadings are not clearly frivolous or legally insufficient on their face. Therefore, plaintiff's proposed claims are not futile.
Further, there is nothing in the record to indicate bad faith on the part of the plaintiff in seeking to amend the pleadings. Nor does it appear that allowing the amendments will unduly prejudice the defendants' case. The assertion of the proposed claim would not require the defendants to expend additional resources to conduct discovery and prepare for trial nor would it delay the resolution of the dispute significantly. See A.V. by Versace, Inc. v. Gianni Versace S.p.A., et al., 87 F. Supp.2d 281, 299 (S.D.N.Y. 2000). No trial date has been set and discovery has not been completed. See id. In any case, "allegations that an amendment will require the expenditure of additional time, effort, or money do not constitute `undue prejudice.'" Id.
Finally, defendants' assertion that there is no new information that would warrant a supplemental pleading is not supported by the record. As noted above, it is undisputed that defendants have received proceeds from the charter and sale of the vessels in the period since plaintiff filed its amended complaint. Although defendants' answer and counterclaims include a claim for liquidated damages and a reference to the market value of the vessels "for chartering," neither statement would have been sufficient to alert plaintiff of its potential entitlement to the proceeds of a sale or charter, pursuant to Article 14(b)(ii), prior to the discovery of the existence of those proceeds. Thus, the information contained in the documents obtained by plaintiff in August 2001 is new information and warrants a supplemental pleading pursuant to Fed.R.Civ.P. 15(d). Therefore, defendants have failed to show that leave to amend should not be "freely given."
Accordingly, IT IS HEREBY ORDERED that:
1) plaintiff's motion for leave to file a second amended complaint and amended reply to defendants' counterclaims is granted;
2) on or before April 29, 2002, plaintiff shall serve and file the amended pleadings; and
3) defendants shall serve and file their answer to, or move against, the amended pleadings within the time provided by the applicable provision of the Federal Rules of Civil Procedure.
IV. CONCLUSION
For the reasons set forth above, plaintiff's motion is granted.